NYK Celebrates Its 129th Anniversary
-Maximize Our "Creative Solutions" and Make Use of Active Strategies to Leap Further Ahead -
October 2, 2014
NYK president Yasumi Kudo addressed company employees on October 2 at the NYK head office in Tokyo marking the 129th anniversary of NYK’s founding. A summary of his speech is provided below.
From this fiscal year, we started our new five-year medium-term management plan, “More Than Shipping 2018,” so today I will be focusing on the plan’s performance goals.
Business Results
After posting a recurring loss of \33.2 billion (US$ 421.2 million) in fiscal 2011, we recorded recurring profits of nearly \18.0 billion (US$ 215.4 million) in fiscal 2012 and more than \58.4 billion (US$ 585.7 million) in fiscal 2013. In addition, we are currently forecasting a profit of \65.0 billion (US$ 626.5 million) for the full year of fiscal 2014. Thus, we have finally established firm profitability. Although our business has been through some tremendous challenges, from the global recession in 2008 to the European financial crisis, the Great East Japan Earthquake, and the major flooding in Thailand, thanks to your efforts, we have finally recovered to the current position. Once again, I offer you my gratitude.
However, I regret to say that our level of recovery is insufficient compared to other industries. I am sure that you have all come across the term P/B ratio. This is an indicator that shows the ratio of a company’s share price to its book value per share. If the P/B ratio falls below 1, it means that the company is undervalued by the stock markets. Unfortunately, our current P/B ratio is less than 1, standing at 0.7. There are various possible reasons for this, but it seems that investors either remain skeptical about our profitability or are not satisfied with the level of profit.
The term ROE is no doubt familiar to everyone as well. This is the ratio of net income to shareholders’ equity, or return on equity. Some say that 8 percent is a standard for ROE. Our net income for fiscal 2013 was \33.0 billion (US$331.3 million), with an ROE of 4.8 percent. Since we are currently projecting net income in the range of \35.0 billion (US$ 337.3 million) for the current fiscal year, ROE will be less than 5 percent for this year as well, a position that compares unfavorably to the 8 percent standard.
More Than Shipping 2018
In order to break out of this situation, the medium-term management plan, “More Than Shipping 2018,” sets targets for fiscal 2016 of \120.0 billion (US$ 1,156.7 million) in recurring profit, \80.0 billion (US$ 771.1 million) in net income, and ROE of 9 percent. For fiscal 2018, the targets are \160.0 billion (US$ 1,542.3 million) for recurring profit, \120.0 billion (US$ 1,156.7 million) for net income, and an ROE of 12 percent. These may seem high goals at first glance, but if we analyze the breakdown of the recurring profit of \58.0 billion (US$ 559.0 million) for fiscal 2013, I think that you will understand that these targets are not that much of a stretch.
We have already achieved profits of approximately \110.0 billion (US$ 1,102.7 million) in the stable-freight-rate businesses. These include terminal, logistics, dry and liquid (including VLCC, LNG, and the offshore business) vessels assigned to long-term contracts, car carriers, auto logistics, and real estate. However, a loss of nearly \60.0 billion (US$ 601.5 million) in the unstable-freight-rate businesses, including containerships, air cargo transportation, and dry and liquid charter-free vessels, has driven down the overall level. It follows therefore that if we can improve the bottom line in the unstable-freight-rate businesses, the goal of \120.0 billion (US$ 1,156.7 million) in recurring profit for fiscal 2016 is not all that difficult to reach. One hundred sixty billion yen (US$ 1,542.3 million) in fiscal 2018 is likewise an achievable target if we are able to operate or expand as planned the LNG shipping and new LNG-related upstream and midstream projects such as Wheatstone and Cameron, the offshore business, auto logistics business, and others.
Future Strategies
First, in relation to improving the bottom line in the unstable-freight-rate businesses, let’s consider the charter-free vessels that have been causing problems in the Capesize bulker business. During the current fiscal year, we will be able to complete redelivery of the majority of the very costly medium-term chartered vessels that have been causing difficulties for a long time. This will leave us with only four to five of these costly ships. Furthermore, during fiscal 2017, we will be able to get clear of these remaining vessels as well, so improvement in the bottom line will progress steadily.
Just so that there is no misunderstanding, I would like to state that there is nothing wrong with keeping charter-free vessels. There are natural fluctuations in our customers’ cargo movements, and these movements often increase rapidly. Without charter-free vessels, we might not be able to meet customers’ demands, so a certain number of charter-free vessels are necessary. The problem is the scale of the charter-free fleet, and, above all, its cost. In future, we must take full advantage of the lessons learned through our experience, and consider the number of charter-free vessels and the mix of short- and long-term vessel-ownership formats in our portfolio. Recently, excess liquidity worldwide has spurred speculative ship orders by investment funds. This has resulted in an oversupply of fleet tonnage, which we expect to continue regardless of real cargo demand. Therefore, I believe that we should make more use of short-term chartered vessels in our fleet composition than before.
The important point is that the original business model for the Capesize bulker division, as a bulk shipping business targeting iron ore and other cargo, was established to record stable profit to cover capital costs. We must restore this model quickly. Because we are steadily building up long-term contracts in countries such as China and India, in addition to moving ahead with redelivery of costly chartered vessels, we can say that this goal is in sight. The Panamax bulkers, whose main cargo is coal, face similar problems and circumstances to the Capesize bulkers, and we must restore them quickly to the stable-profit-recording model originally intended.
The dry-bulk carrier fleet, including the Capesize, Panamax, handysize, and wood chip carriers, is our largest division, accounting for more than half of the NYK Group’s nearly 900-vessel cargo fleet; as such, the division has a vital role to play in stabilizing our earnings.
With regard to breaking out of the unstable-freight-rate businesses, I would like to emphasize the efforts in the containership business. Even with the inclusion of the terminal business, the huge recurring loss of \37.0 billion (US$ 468.9 million) in fiscal 2011 had declined to a loss of \2.5 billion (US$ 30.3 million) in fiscal 2012, and \0.7 billion (US$ 7.0 million) in fiscal 2013, improving almost to break-even point. In particular, even though the average Europe and U.S.-bound freight rate from Asia in fiscal 2013 dropped below the fiscal 2011 level, we achieved a substantial improvement in the bottom line of nearly \40.0 billion (US$ 401.0 million). Even compared to fiscal 2012, this is extremely noteworthy since the improvement occurred in circumstances where the freight rate had deteriorated.
For the current fiscal year as well, despite forecasts that freight rates for Europe will remain mostly flat year on year, while those for North America will worsen slightly, we are expecting to move into the black for the full year at this time. This is thanks to progress on cost reduction due to steady activities, such as the IBIS and EAGLE projects, to reduce the 3 M’s (muda: non-value-adding activities; mura: unevenness in production or work activities; and muri: excessive burdens). Furthermore, we will be introducing a total of eight new ultra-large, energy-conserving 14,000 TEU containerships as replacements for existing ships, starting with four vessels in 2016, followed by another four in 2017. This is expected to result in cost reductions of over \20.0 billion (US$ 192.7 million) per year. In the current situation, only a few containership operators are operating in the black. Most operators continue to accumulate losses. It is thought that any drop in freight rates will be limited in the future, and stable profits are thus within sight for our liner trade business from fiscal 2016 onwards.
“Creative Solutions”
Our current medium-term management plan follows the previous medium-term management plan, “More Than Shipping,” which emphasized the pursuit of differentiation from other competitors, enhanced cost competitiveness, and business expansion. However, we will pursue the current “More Than Shipping” plan with a greater focus on “creative solutions,” including our capability to reduce the 3 M’s. The best examples of the current plan’s vision are activities that use IT, big data, and the latest energy-conserving technology to improve profitability in the containership business. These include the advancement of the IBIS and EAGLE projects, and the introduction of ultra-large containerships equipped with the most up-to-date energy-conserving technology. Extending these positive examples into other business divisions such as dry-bulk carriers, liquid carriers, car carriers and logistics, and even into the corporate division is, I believe, one of the major themes of this new management plan, and I have great expectations of the 3 I’s (integrity, innovation, and intensity) from all of you.
Next, I want to talk about our expanding divisions. This is about developing businesses that are literally concerned with “More Than Shipping;” moreover, businesses in which high technological capabilities are required. As I mentioned earlier, we are participating in an LNG-related upstream business through our acquisition of a partial interest in jointly owned facilities in the Australian Wheatstone gas field and operation. Operations here are due to begin at the end of 2016. Additionally, we have decided to take part in the Cameron LNG Project, a mid-stream business that will construct and manage a liquefaction facility for shale gas in the U.S. state of Louisiana, with operations scheduled to start at the end of 2017. These projects require advanced technologies and safety, and the total investment is vast. We expect these projects to deliver a long-term high return and to make a significant contribution to the expansion of the LNG shipping business.
In relation to the offshore business, we, together with SBM Offshore N.V. (Netherlands) and others, have concluded contracts for two additional floating production, storage, and offloading (FPSO) units for Petroleo Brasileiro S.A. (Petrobras; Brazil), and these units will begin operation at the end of fiscal 2015. Knutsen NYK Offshore Tankers AS (KNOT) has concluded its first contract in the floating storage and offloading (FSO) business with Total S.A. (France), with operations due to begin at the end of 2016. We have decided to dispatch personnel from the NYK Group’s technical division, including deck officers and engineers, to FPSO, FSO, and other businesses where they can gain expertise and know-how by being directly involved in the engineering, procurement, and construction (EPC) of plant engineering. I hope this knowledge will form the cornerstone for participation in new businesses such as floating storage and regasification units (FSRU) and floating liquefied natural gas facilities (FLNG) in the future.
Furthermore, we have decided with GDF Suez S.A. (France) and others to build the world’s first large-size LNG bunkering vessel, for completion in the second half of 2016, and to concurrently establish a marine LNG-fuel sales company. This business model, the first of its kind, has a promising future since demand for LNG fuel is expected to expand rapidly amid increasingly stringent NOx and SOx regulations not only in Europe but throughout the world. The decision by United European Car Carriers (UECC; Norway), which transports automobiles in the European region, to build two dual-fueled PCCs and to purchase LNG fuel from the new company contributed significantly to the launch of this business. In addition, these two vessels will be the first LNG-fueled PCCs for the NYK Group, and will be some of the very few LNG-fueled vessels in the shipping industry worldwide. By honing our knowledge ahead of other companies, I hope to make this one of the technologies that differentiates us from other companies on the environmental and cost fronts.
Furthermore, in the car transport related businesses, the storage-location and inventory-management system for cars using radio-frequency identification tags (RFID) has been widely recognized for its excellence. This product, which is the outcome of many years of research and development (R&D) at the NYK Group, has begun to generate great results amid the expansion of the auto logistics business including RORO terminals.
Conclusion
I have already spoken about various facets of the medium-term management plan, but to summarize once more, our aim is to reach the level of profit that our shareholders expect. To do so, we will make maximum use of our “creative solutions” in a broad sense. The concept of “creative solutions” covers not only marine technologies, engineering, logistics technology, and information technology, but also reduction of the 3 M’s, development of kaizen (improvement), and other aspects underpinned by originality and ingenuity in all business pursuits, from gemba (front-line sites) to the head office management divisions. In this way, we will first return the dry-bulker and containership businesses, which make up the majority of our fleet, to the stable-earning divisions they are meant to be. Meanwhile, we will steadily build up further stable profit in businesses where future expansion is anticipated, including the offshore business, LNG shipping, and LNG-related businesses. However, before we reach these goals, we must recognize that stabilizing our company’s performance is a duty of profound importance that entails an extremely heavy social responsibility. The logistics business in which we are involved is a main artery for the global economy and thus an indispensable part of the world’s infrastructure. In that sense, let us unite as a Group to dedicate our integrity, innovation, and intensity to achieving our performance goals.
Before I finish, I would like to say a few words on issues related to compliance. In March this year, I regret to say that NYK received a cease-and-desist order and surcharge-payment order from the Japan Fair Trade Commission. This relates to suspected violation of Japan’s Antimonopoly Act in our car transport business. The investigations by the European and U.S. authorities are still ongoing, and we continue to give them our full cooperation. As I have stated repeatedly in the past, the fact that this incident has occurred is something we must take extremely seriously, and we must make efforts to prevent any recurrence.
To ensure that engagement, we are steadily developing measures across the entire NYK Group both in Japan and overseas, including training on antitrust laws, written pledges on compliance with antitrust laws, and assessments of antitrust risks.
All of these activities are vital in order for each and everyone of us to pursue our daily business with peace of mind. Let all of us at the NYK Group work as one and engage in activities with a strong sense of personal responsibility.
Finally, I would like to conclude by offering my sincere wishes for the good health and prosperity of you and your families.
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